Federal Fiscal Court rules on treatment of lease guarantee in connection with property acquisition

The VAT treatment of lease guarantee payments made in connection with a property acquisition has been subject to several inconsistent lower court decisions, with the courts ruling that the payments are either non-VATable indemnities or VATable lease payments, depending on the facts and circumstances of the case. The Federal Tax Court has now ruled for the first time on the treatment of a lease guarantee in connection with a property acquisition. In its decision dated 11 February 2010 (V R 2/09), the Court held that where the amount guaranteed under a lease guarantee is not fully covered by lease payments arising from an existing lease agreement, the amount paid under the lease guarantee is to be treated as a reduction in the purchase price of the property, which therefore reduces the purchase price for purposes of VAT. According to the Court, an adjustment of the purchase price for VAT purposes requires the immediate coherence of the purchase price reduction of the VATable service, i.e. the delivery of the property. This requirement is only met if the compensation under the lease guarantee correlates to the reduction in the value of the property, which is based on the fact that the actual lease payment amount is lower than the contractual (guaranteed) lease payment amount. The agreement relating to the lease guarantee only serves as a legal measure to protect the buyer from a decrease in the value of the acquired property.

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Dr. Bettina Lieber | Düsseldorf